[Federal Register Volume 61, Number 4 (Friday, January 5, 1996)]
[Notices]
[Pages 433-434]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-168]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 36649; File No. SR-NASD-95-50]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by National Association of Securities Dealers, Inc. Amending the
Buy-in Procedures in Section 59 of the Uniform Practice Code to Clarify
the Appropriate Delivery Deadlines for Buy-in Notices
December 28, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ on November 15, 1995, the
National Association of Securities Dealers, Inc. (``NASD'' or
``Association'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') a proposed rule change that amends Section
59 of the Uniform Practice Code (``UPC'' or ``Code'') to revise the
buy-in procedures to clarify the appropriate delivery deadlines for
buy-in notices.
\1\ 15 U.S.C. Sec. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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Notice of the proposed rule change, together with the substance of
the proposal, was issued by Commission release (Securities Exchange Act
Release No. 36496, November 20, 1995) and by publication in the Federal
Register (60 FR 58695, November 28, 1995).\3\ No comment letters were
received. The Commission is approving the proposed rule change.
\3\ The proposal was originally filed with the Commission on
October 26, 1995. The NASD subsequently submitted Amendment No. 1 to
the filing. Letter from Elliot R. Curzon, Assistant General Counsel,
NASD, to Karl J. Varner, Over-the-Counter Regulation, Division of
Market Regulation, SEC, dated November 15, 1995.
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I. Background
Under Section 59 of the Code, when the seller has not completed a
contract of sale of securities by delivering the securities called for
in the contract on settlement day, the buyer may close the contract by
purchasing the subject securities in the open market (``buying-in'').
When securities are bought-in to complete a contract, the seller is
liable for any difference between the contract price and the buy-in
price.
Pursuant to subsection 59(a) of the Code, a buy-in is initiated by
the buyer delivering a notice of buy-in to the seller at his office not
later than 12 noon, the seller's time, two business days preceding the
execution of the proposed buy-in. Subsection 59(b) provides that the
notice must include the terms of the contract to be closed and must
state that unless delivery is effected at or before a certain specified
time not earlier than 11:30 a.m., the buyer's local time, the security
may be bought-in for the account of the seller (meaning the seller
assumes the liability for the market price of the security bought-in).
Subsection 59(b) also provides that if the originator of the buy-in
notice is a participant in a registered securities depository and the
security to be bought-in is a depository eligible security, the buy-in
may not be executed before 2:30 p.m., Eastern Time.
The NASD has identified an inconsistency in subsection 59(b) in
that the provisions permit a buy-in notice to specify the seller's
delivery deadline at a time no earlier than 11:30 a.m., the buyer's
local time, yet the buy-in may not be executed before 2:30 p.m.,
Eastern Time. If the seller obtained securities and tendered them for
delivery after the notice deadline but before the buy-in was executed,
the provisions of the rule and the notice could permit the buyer to
refuse delivery and subject the seller to the risk of an execution at a
price higher than the original contract price. To resolve this anomaly,
the rule change amends subsection 59(b) of the UPC to notify the
delivery times permitted to be specified in the buy-in notice.
II. The Terms of Substance of the Proposed Rule Change
The rule change amends Section 59 of the UPC to modify the delivery
times permitted to be specified in the buy-in notice. With respect to
buy-in notices for depository eligible securities where the originator
is a depository participant, the notice may not specify a delivery time
earlier than 3:00 p.m., Eastern Time.
In addition, the rule change amends UPC subsection 59(b)(2), which
permits the recipient of a buy-in notice to retransmit the notice to
another broker-dealer from whom the subject securities are due. A
retransmitted buy-in notice must be delivered to the recipient not
later than 12 noon, the seller's local time, on the business day
preceding the buy-in date and the specified delivery time in the
original notice.
III. Discussion
The Commission believes that the rule change is consistent with the
provisions of Section 15A(b)(6) of the Act \4\ in that the rule change
will refine the buy-in provisions of the code to recognize new
developments in the clearance and settlement system.\5\ Furthermore,
the rule change will facilitate the clearance and settlement of
securities by eliminating an inconsistency in subsection 59(b) that
permitted a buy-in notice to specify the seller's delivery deadline at
a time no earlier than 11:30 a.m., the buyer's local time, yet the buy-
in could not be executed before 2:30 p.m., Eastern Time. For depository
eligible securities where the originator is a depository participant,
the rule change precludes the buy-in notice from requiring the seller
to deliver the securities before 3:00 p.m., the seller's time. The
provision will reduce the risk of the buyer exposing the seller to an
execution at a price higher than the original contract price. However,
the rule change permits broker-to-broker buy-ins in nondepository
eligible securities that specify an earlier delivery time (no earlier
than 11:30 a.m. local time).
\4\ 15 U.S.C. Sec. 78o-3.
\5\ The NASD noted that with the advent of same day funds
settlement (SDFS) in early 1996 and the new settlement time frames
associated with the Depository Trust Company's SDFS System, the
appropriate buy-in execution time in subsection 59(b) should not be
prior to 3:00 P.M. Eastern Time.
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In addition, the rule change amends UPC subsection 59(b)(2) to
require the recipient of a buy-in notice to retransmit
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the notice to another broker-dealer from whom the securities are due
not later than 12 noon, the seller's local time, on the business day
preceding the date of execution of the buy-in. The specified delivery
time in the retransmitted notice must not be earlier than the time
specified in the original notice. The rule change modifies the existing
language to provide the seller with 23\1/2\ hours to deliver the
securities to the recipient that retransmitted the buy-in notice and is
an improvement to the current procedures that arguably permit
retransmittal to occur at the end of the previous business day, which
provided the recipient with as little as 18\1/2\ hours notice.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change SR-NASD-95-50 be, and hereby is,
approved.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Jonathan G. Katz,
Secretary.
[FR Doc. 96-168 Filed 1-4-96; 8:45 am]
BILLING CODE 8010-01-M
